People line up for unemployment applications in Hialeah, Florida. Photo / Getty Images
People line up for unemployment applications in Hialeah, Florida. Photo / Getty Images
The global economy faces a crushing blow far worse than the financial crisis as lockdowns paralyse businesses and families across the world, the International Monetary Fund has warned.
An estimated US$9 trillion ($14.8 trillion) of output will be lost this year and next, the institution (IMF) said - equal to the combined economies of Germany and Japan.
Overall its economists expect global GDP to fall by 3 per cent in 2020, the biggest drop in almost a century.
The figures underline growing fears that measures to combat Covid-19 risk causing catastrophic damage to the world economy which will tip millions into poverty and take many years to overcome.
Gita Gopinath, the IMF's chief economist, said: "As countries implement necessary quarantines and social distancing practices to contain the pandemic, the world has been put in a Great Lockdown.
"The magnitude and speed of collapse in activity that has followed is unlike anything experienced in our lifetimes. This is a crisis like no other.
All the major economies have been hit. Photo / File
"This makes the Great Lockdown the worst recession since the Great Depression, and far worse than the global financial crisis."
The UK economy will shrink by 6.5 per cent this year, the IMF predicts, its biggest fall since 1921 when demobilising after the First World War.
Major eurozone economies are forecast to suffer even bigger slumps, from a crash of 7 per cent in Germany to 9.1 per cent in Italy.
The falls are slightly smaller in other rich economies, however, with Japan, the US and Canada on track for recessions of 5.2 per cent, 5.9 per cent and 6.2 per cent of GDP respectively.
Assuming that the worst of the virus and the lockdown takes place in the second quarter of the year, the IMF predicts a modest bounceback into 2021.
But GDP will not return to its level at the end of 2019 until 2022 at the soonest, and lost output suffered during the shutdowns will be gone forever.
In practice, this would mean many jobs lost now will come back only slowly, sending unemployment spiking higher and causing lasting social problems. Those lucky enough to stay in work will likely suffer a long hit to their living standards, while young people will suffer a crushing blow to their life chances.
Even this gloomy forecast is based on highly uncertain factors including the length of the pandemic, the development of treatments or vaccines, progress in reopening the economy, the extent of the damage to businesses and the state of the financial system at the end of the outbreak.
In its World Economic Outlook report, the IMF said: "Even after the severe downgrade to global growth, risks to the outlook are on the downside. The pandemic could prove more persistent than assumed in the baseline.
The front page of the Brooklyn Daily Eagle on 24 October 1929. Photo / Getty Images
"Moreover, the effects of the health crisis on economic activity and financial markets could turn out to be stronger and longer lasting, testing the limits of central banks to backstop the financial system and further raising the fiscal burden of the shock.
"Of course, if a therapy or a vaccine is found earlier than expected, social distancing measures can be removed and the rebound may occur faster than anticipated."
The fear of a second wave of infections after lockdown is lifted could also paralyse consumers and businesses, with long-lasting effects. The IMF said: "Depending on the duration, global business confidence could be severely affected, leading to weaker investment and growth."
Governments are already borrowing heavily to support their health systems and the economy, but the IMF said more will need to be done.
It said: "Fiscal measures will need to be scaled up if the stoppages to economic activity are persistent, or the pickup in activity as restrictions are lifted is too weak."
This may only be possible in richer countries with more room to borrow, however. The IMF - which is funded by countries around the world to act as a global lender of last resort - is is giving debt relief to 25 countries including Afghanistan, Yemen and Rwanda to help them through the crisis.
The G7 group of developed nations is also looking at offering a break from debt payments for the poorest countries.
Governments should also ramp up spending after the crisis is over to fire up their economies and get growth back on track through tax cuts and a spending spree, the IMF recommended.
It said: "Broad-based fiscal stimulus where financing constraints permit (such as public infrastructure investment or across-the-board tax cuts) can pre-empt a steeper decline in confidence, help lift aggregate demand, limit the propagation of the shock by reducing bankruptcies, and avert an even deeper downturn.
"But it would most likely be more effective in stimulating spending after the outbreak recedes, containment efforts are scaled back, and people can move about freely."
The advice came as the Office for Budget Responsibility set out the full scale of the damage facing the UK economy and the public finances.
It said a three-month shutdown could send GDP tumbling by as much as 35 per cent in the second quarter, increasing unemployment by 2m and forcing the budget deficit up to 14pc of economic output, or £273bn.
This would indicate a significant rise in the national debt even before any plan to stimulate growth after the pandemic, limiting the government's ability to take further action.
